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Amended Lien Law and Energy Infrastructure Construction Projects

October 6, 2017

The Legal
Intelligencer

The
Pennsylvania Mechanics’ Lien Law, 49 P.S. Section 1101 et seq. (the Lien Law),
provides contractors a powerful legal hammer for the recovery of payment owed
for work performed on a construction project; they can impose a lien against
the property on which their work was performed, clouding the owner’s title,
until payment is received. In December 2016, as a result of last year’s Act 142
(the act) amendments to the Lien Law, the Department of General Services
launched the online State Construction Notices Directory (the directory). Prior
to the creation of the directory, there was no streamlined system for owners
and general contractors to track subcontractors and suppliers on a project
site. Now, the directory provides greater certainty with respect to who may
have lien rights, and helps owners and general contractors track work performed
by subcontractors, sub-subcontractors and suppliers with whom they otherwise do
not have a contractual relationship.

In light
of the updates to the Lien Law, owners, general contractors, and subcontractors
involved with the ever-increasing energy infrastructure projects within the
commonwealth would be prudent to evaluate their business practices to ensure
compliance with—and to take full advantage of their rights under–the amended
Lien Law.

Applicability
to Energy Infrastructure Construction Contracts

Although
the case law in Pennsylvania is not completely settled, it appears from the
text of the Lien Law, and the case law developed from it, that many well pad
and pipeline construction projects are subject to the Lien Law. For example, a
Pennsylvania appellate court held that a “well for the production of gas, oil
or other volatile or mineral substance” falls within the definition of a
“structure or other improvement” governed by the Lien Law, so long as the well
involves “the erection or construction of a permanent improvement.” See Yellow Run Coal v. Yellow Run Energy, 420 A.2d 690, 692 (Pa.
Super. Ct. 1980); compare with Stingray Pressure Pumping v. EQT Products, No.
CV 16-279, (W.D. Pa. Dec. 21, 2016) (the mere furnishing of “labor, material,
machinery and supplies … in connection with drilling and/or operation of the
well” is insufficient to plead services “related to the ‘construction,
erection, alteration or repair’ of a building or improvement under the Lien
Law).

Additionally,
lien rights can attach to subsequent “substantial additions” to an existing
improvement (i.e., a previously constructed well pad or pipeline). Another
Pennsylvania court held the addition of plastics-making machinery to a
pre-existing plant was a “substantial” enough addition for the associated work
to be covered by the Lien Law, as in Wendt
& Sons v. New Hedstrom, 858 A.2d 631, 635 (Pa. Super. Ct.
2004). This suggests that activities like the installation of additional
surface facilities or the erection of infrastructure necessary to tie a well
into a pipeline are subject to the Lien Law.

Overview
of the Notices Required by the Act

The
amendments to the Lien Law created a structured notice procedure for owners and
contractors on “searchable projects” (projects consisting of the construction,
alteration or repair of an improvement costing at least $1.5 million). Specifically,
the act permits four new types of filings within the Directory: notice of
commencement; notice of furnishing; notice of completion; and notice of
nonpayment.

A notice
of commencement should be filed by the project owner or its agent before any
labor, work or materials are furnished for the project and must contain, among
other things, a “legal description” of the property, including the tax
identification number of each parcel included in the project, and the “unique
identifying number” assigned to the notice by the directory. The owner must
post this notice on the project site, make reasonable efforts to ensure it
remains posted during the project, and ensure the Notice is made part of the
contract documents provided to all subcontractors. Contractors must include a
provision in each of their subcontracts warning their subcontractors that the
failure to file a notice of furnishing will forfeit the right to file a
mechanics’ lien.

Similar
to the structure of Ohio’s Lien Law, the act requires an owner (or an agent of
the owner) to file a notice of commencement in order to trigger compliance with
the act. Filing a notice of commencement ensures an owner receives notices from
all subcontractors and suppliers performing work or furnishing materials on a project
site. Unlike in Ohio, a notice of commencement is not “mandatory” under
Pennsylvania law; failing to file one will not expose an owner to potential
penalties under the Lien Law, but will only preclude an owner and its lender
from tracking the subcontractors with potential lien rights on a given project,
thus increasing the risk of “hidden liens” later coming to the surface. Failure
to file a notice of commencement in Ohio could expose the owner to liability
for a lien claimant’s actual costs and expenses incurred in gathering the
information necessary to perfect a mechanics’ lien claim, and for all of its
general contractor’s damages relating to a lien claim that could have been
avoided had the notice been filed.

If an
owner files a notice of commencement, first or second-tier subcontractors or
suppliers must file a notice of furnishing within 45 days after first
performing work or first providing materials on the job site to preserve their
lien rights. Importantly, the filing of a notice of furnishing does not absolve
a subcontractor of strictly complying with the remaining requirements and
deadlines for prosecuting a lien claim that have always existed under the Lien
Law.

The act
also permits (but does not require) an owner to file a notice of completion
within 45 days of the “actual completion” of work on the project, for
informational purposes. Additionally, subcontractors are permitted (but not
required) to file a notice of nonpayment when they have not received payment in
full for work or materials provided.

Implications
to Oil and Gas Projects

Given the
minimal case law respecting lien rights on pipeline, well pad, or other oil and
gas-related construction projects, there is still much unknown with respect to
how the act will impact energy infrastructure projects. Nevertheless, based
upon the new notice requirements and the lessons learned from other
jurisdictions, all parties to a construction project should consider the
following important principles.

Contractors
and suppliers seeking to avail themselves of potential lien rights down the
road should exercise particular caution when working on interstate projects.
For example, where a pipeline construction project spans one or more states,
the applicable statutory lien rights and requirements will change from one
state to the next.

For
owners of oil and gas projects, the greatest amount of confusion to arise from
the act will likely relate to providing a “legal description” of the property
in the notice of commencement, and complying with the act’s posting
requirements. In the directory, many owners have merely provided a single
address as the “legal description.” This approach may not be practical or
feasible for a pipeline construction project, where numerous parcels, deeds and
easement agreements or eminent domain condemnations constitute the “legal
description” of the property. For these projects, owners might consider
drafting a description of the property that includes the start and end points
of the pipeline, and provide a complete list of counties within which the
pipeline is located. Additionally, owners should carefully consider how to
comply with the act’s requirement to “conspicuously post” a copy of the notice
of commencement at the project site. Given the transient nature of a given work
site on a pipeline construction project, owners may consider posting the notice
of commencement in their office trailers and any trailers belonging to their
contractors.

As for their contracts, owners should
contractually require contractors (and their subcontractors) to include a
provision in each of their subcontracts, and for any subsequent subcontracts
entered, warning their subcontractors that the failure to file a notice of
furnishing will forfeit the right to file a mechanics’ lien. Regardless of whether
an owner utilizes the new Pennsylvania State Construction Notices Directory, it
should always contractually protect itself from costs and fees associated with
challenging or discharging any potential liens filed by subcontractors.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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